Digging Deeper podcast | Will Jet Airways rise post the dizzying spiral?

Jet Airways could be called a cautionary tale about corporate hubris and mismanagement but maybe there is light at the end of the long and dizzying spiral.

But how do we start telling you this story?

Let us start with a Business Line report published on July 16, 2019  which stated that Jet Airways’ Committee of Creditors (CoC) had set into motion a process to select a resolution professional (RP), to verify  claims, and decide on the appointment of SBI Caps as the advisor for sale of assets.

The claim amount from the financial creditors was then estimated at about ₹8,500 crore and bids were supposed to be invited for the stressed assets in August.

On  August 26, Business Today reported that the airline's resolution professional Ashish Chhawchharia had reportedly received an expression of interest from an overseas airline last week, well past the submission deadline of August 10.

The grounded Jet Airways' total liabilities had shot up to Rs 30,558 crore earlier this month.

Today, on August 26, lenders, who hold a majority 51 per cent stake in the airline, are expected to consider the interim funding of Rs 10 crore that lead banker SBI has already approved as well as a new expression of interest (EoI) submitted by the said foreign airline.

In this Money Control Deep Dive, we bring you the Jet airways saga  in the context of just how the company came to this juncture.

Between liabilities and hope

As has been reported before, the airline's resolution professional (RP) Ashish Chhawchharia received an EoI from the overseas airline last week, and a source told The Business Standard that the new EoI will be verified and put up for consideration of the airline's CoCs.

According to multiple news sources, the Resolution Professional had earlier received EoIs from Panama-based Avantulo Group and a Russian fund Treasury RA Creator. Industrialist Anil Agarwal-led Volcan Investments backed out shortly after submitting an EoI.

Business Standard also reported that the grounded airline's liabilities continue to mount even as Resolution Professional Ashish Chhawcharia has admitted Rs 12,555 crore worth of claims and rejected claims worth over Rs 11,996 crore of the total number.

According to the daily,  these include Rs 10,224 crore  worth of lenders' dues with interest.  Rs 17,922 crore of dues are owed to operational creditors excluding employees.  Rs 545 crore is owed to   employees and workmen. And Rs 789 crore is owed to representatives of workmen and employees  and Rs 1,108 crore to other creditors.

Reports say that  the National Company Law Tribunal (NCLT) had told the RP to discuss the matter with the CoC so that interim funding could be arranged to pay off salaries to the employees. How soon will that happen is still not clear.

Business Standard and other news sources have also reported that while State Bank of India agreed to release its share of the interim funding, the other lenders are yet to take a call. The funds will reportedly be used for maintenance and preservation of aircrafts, which have been grounded since April.

An executive from a public sector lender told the daily and we quote, "While slots held by Jet have been temporarily given to other airlines, there is no firm assurance that these would be released in case of revival of Jet. The actions of the income tax and enforcement directorate against the airline's founder Naresh Goyal, too, are factors to deter potential buyers."  Unquote.

The source further added that the CoC nonetheless continues to support resolution efforts and has not discussed liquidation yet.

The CoC meet today is expected to address many of the above mentioned issues. Including  the matter of the insolvency proceedings against Jet Airways in the Netherlands, where it was declared bankrupt after failing to pay two European creditors.  In April, H Esser Finance Company and Wallenborn Transport had also filed a petition citing unpaid claims worth around Rs 280 crore.

Citing PTI sources, Business Today has added that The National Company Law Appellate Tribunal (NCLAT) last week asked lenders of Jet Airways whether they are ready to pay fees and bear the costs incurred by the Dutch court administrator. A three-member NCLAT bench headed by Chairman Justice S J Mukhopadhyay asked the Committee of Creditors (CoC) of Jet Airways to file an affidavit within a week in this regard. The next hearing is scheduled for September 4.

Cloudy weather ahead

An earlier Money Control report cites  sources in the industry to surmise that the interest in Jet may be limited to its assets such as aircraft and airport slots.

The story goes on to say that Jet Airways' new suitor, Synergy Group Corp, has failed to enthuse industry observers who fear the South American Group could be more interested in just the assets, and not the airline as a whole.

This new development will obviously be discussed by Jet Airways lenders  today as also  options to release more funds to meet the airline’s maintenance costs, as we mentioned before.

It was The Economic Times that had in fact reported that the Synergy Group Corp, which owns Colombian carrier Avianca Holdings, was  Jet’s  new suitor.

Sources  later told Money Control that Avianca itself is facing financial challenges, so the span of its interest in Jet may not be  wide-spread.

The plot gets murkier

With the company's future in uncertainty, its founder’s image has also taken a beating. On August 24, PTI cited the Enforcement Directorate (ED) to report that Jet Airways Founder Naresh Goyal had allegedly created tax evading schemes to siphon off funds abroad through dubious or fictitious transactions. On Friday last, ED  had carried out searches  at a dozen locations connected to Goyal, his firms and partner agencies in Mumbai and Delhi on charges of alleged contravention of the foreign exchange law.

In a statement, the agency stated, "The search resulted in the seizure of various incriminating documents and digital evidences. Further investigation and analysis of the seized documents is going on." Unquote.

The ED claimed that Goyal  indirectly  controls various entities abroad, some of which are in tax haven nations and added, "Fictitious and inflated payments appear to have been made to some of these foreign entities under various airline lease agreements, aircraft maintenance agreements, among others. Huge amounts appear to have been sent abroad by way of inflated commission to its own group entity in Dubai which acted as airline's exclusive overseas general sales agent (GSA)." Unquote.

The agency claimed that the  probe not only indicated that Goyal is  likely to be the beneficial owner of some bank accounts abroad having huge deposits and that these transactions could involve various violations under the Foreign Exchange Management Act.

Business Today cited official sources to add  that the charge of undisclosed assets held abroad could lead ED to book Goyal under the stringent and criminal anti-money laundering law in the future. The businessman's empire, the agency said, had 19 privately-held companies, five of which were registered abroad.

We quote Business Today, "A particular company under the ED scanner is the Isle of Man-based Tail Winds Corporation and it is suspected that it controlled all the activities of Jet Airways.

The company (Tail Winds) was formed by Goyal in 1992 and the agency also had searched the premises of one Hasmukh Deepchand Gardi, a partner and investor in the Isle of Man firm. Officials said that Gardi, who is based in Dubai, also had a mention in the global offshore holdings list, known as the  Panama Papers , and the agency suspected that the money invested in Tail Winds was sourced through illegal means." Unquote.

As we know already,  in March this year Naresh Goyal had stepped down as the chairman of Jet Airways which then shut down its operations on April 17 after running out of cash.

In July, according to various sources, a Ministry of Corporate Affairs (MCA) inspection report had found large-scale irregularities, including diversion of funds, at the airline.

On May 25, reported the Express web desk,  Goyal and his wife Anita were stopped from leaving the country by immigration authorities at Mumbai airport minutes before their aircraft was about to take off for London via Dubai.

Goyal  later challenged the travel ban imposed on him, in the Delhi High Court, on the ground that he was not given any opportunity to clarify. which denies him what he called was  natural justice.

The court, however, refused to allow him to leave India and asked him to give Rs 18,000 crore bank guarantee if he wanted to travel.

The fall from grace

In April this year, India Today cited Reuters to explain just how exactly  Jet Airways crumbled into disgrace.

We quote, "When Naresh Goyal and his wife, Anita, started Jet in 1993, state-run Air India was the only formidable opponent, and the country's aviation market was just taking off. Goyal's pitch was ensuring the country's biggest private carrier had impeccable service - a world-class product built in India. Jet's problems began when it embarked on an aggressive international expansion plan, said an industry executive who has been associated with the airline. The carrier ordered 22 wide-body aircraft for delivery over about 18 months, starting in 2006, depleting cash, the executive said. Then Jet bought a struggling Indian airline called Sahara for 14.5 billion rupees ($209 million) in 2007 that had an ageing fleet and did not fit Jet's corporate culture." Unquote.

In the interim, noted India Today,  a low-cost carrier IndiGo, had begun chipping away at Jet's market share with cheap fares. To compete with low-cost carriers, says Reuters , Jet  lowered prices without reducing its expensive services. High fuel prices and hefty taxes  compounded the spending issues.

Things almost came to a head when in 2013, Jet was close to running out of cash, but survived collapse when Abu Dhabi's Etihad Airways bought a 24 percent stake in the Indian airline. As part of the deal, Etihad also bought three pairs of Jet's landing slots at London's Heathrow airport and 51 percent stake in its frequent flyer program, informed Reuters.

By 2019, the situation had become dire and in January this year, Jet Airways and its main lender, State Bank of India (SBI), met with aircraft lessors to assure them there was a plan to rescue the debt-laden carrier so it could pay them.

Says Reuters and we quote, "The idea was to shore up confidence in one of India's biggest brands, squeezed by low fares and high costs. But some lessors quickly lost patience as the bank did not provide details and Jet's founder angrily defied them to take back planes. At one point, the airline's usually jovial founder and chairman, Naresh Goyal, banged his fist on a table, jarring some of the lessors who had flown to Mumbai from Dublin, Singapore and Dubai, said one person who attended the discussions. “ Unquote.

Sources went on to say that Goyal's emotional outburst and Jet's subsequent failure to pay up as promised may have pushed the relationship between the airline and its lessors to a breaking point, prompting some to take the drastic step of pulling their planes from its fleet.

That informs Reuters, led Jet, which blazed trails in one of the world's fastest-growing air travel markets, to cancel hundreds of flights and to look uncertainly towards the future while saddled with more than $1.2 billion in debt where big sums of money are owed to banks, pilots and suppliers.

According to Reuters, the 26-year-old airline had posted losses in eight of the past 10 years and its share of the domestic passenger market had fallen to about 15.5 percent in 2018 from 22.5 percent in 2015.

About 60 percent, or more than $600 million, had been wiped off Jet's market value by 2018.

The state-run banks then, led by SBI, took a temporary stake in Jet, promised a new loan of 15 billion rupees ($216 million) and forced 69-year-old Naresh Goyal to resign as chairman.

Jet's lenders then laid out terms for potential bidders to buy up to 75 per cent stake in the carrier.

Lessons to be learnt

As Reuters pointed out, the humbling of one of India's most successful international brands illustrates the challenge of making money in the country's aviation sector, dominated by low-cost carriers such as IndiGo and SpiceJet Ltd.

We quote, "The Indian market is also highly price-sensitive, and airlines compete to keep fares low, even at a loss, to continue expanding. The domestic market has seen around 20 percent growth in the number of passengers over the past few years.

Carriers including IndiGo, SpiceJet and Vistara, a joint venture between Singapore Airlines and Tata Sons, have over 1,000 planes on order from Boeing Co and Airbus SA." Unquote.

A source added that India's aviation market is cut-throat and it entails the survival of the fittest. One needs not only deep pockets but a deep threshold for pain, the source added.

Those who cannot outlast their challenges, leave, often in disgrace. Case in point being Kingfisher Airlines that went bankrupt in 2012, leaving behind a loss of millions of dollars with   thousands of people losing their jobs.

Sources also say that Goyal's penchant for control is one of the reasons behind the unwillingness of potential investors to make a big deal. For instance, Tata Sons was in talks with Jet in November 2018  but a deal never materialised.

Furthermore, sources told Reuters that Indian rules cap foreign airline investment in domestic carriers at 49 percent, and that narrows the list of potential investors and  aviation financiers.

A human story

In the end, the fall of Jet Airways is not just the story of a corporate fairytale gone sour. It is also a human story and with the airline's future in the dark, the fate of  over 16,000 employees that were on payroll and about 6,500 employees who were on contract, is in jeopardy. PTI has also reported that a section of employees of JetLite, a wholly-owned subsidiary of Jet Airways, had  wanted their claims to be included in the ongoing insolvency proceedings of the parent firm.

Pilots of Jet Airways were not paid salaries from this January onwards. Engineers and senior management were also not paid for three months. The ground handling and cabin crew did not get their March salary either  and as was reported widely, Jet Airways' Officers & Staff Association, in a press conference, questioned why the airline has not paid salaries before suspending operations.

According to a spokesperson , this  crisis was like waging a corporate war and the  government needed to intervene. Around 22,000 other staff and workers related to the vendors, such as caterers, hotels, logistics companies of Jet Airways, have also been  impacted.

An earlier Money Control report cited sources to say that several ground staff and pilots are being actively poached by budget carriers. Ever since a shutdown of Jet Airways became inevitable, rival companies started talks with senior employees to hand them job offers. Jet Airways had about 1,400 pilots. Of them, 350-400 have already left and joined rival companies. But the issue of unpaid dues remains unaddressed. Post today's proceedings, we may learn if Jet Airways in on its way to recovery and if  it will find  a way to be accountable to many members of its staff who have been left in the lurch without a lifeline in sight. For now, the fate of a once formidable brand hangs precariously in balance.